Chapter 5 Location and Layout Strategies

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Chapter 5 Location and Layout

Strategies

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Outline

The Strategic Importance Of LocationFactors That Affect Location DecisionsMethods Of Evaluating Location AlternativesThe Strategic Importance Of Layout Decisions

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Outline

Types of LayoutOffice LayoutRetail LayoutWarehousing and Storage LayoutsFixed-Position LayoutProcess-Oriented LayoutWork CellsRepetitive and Product-Oriented Layout

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Location Strategy

One of the most important decisions a firm makesIncreasingly global in natureLong term impact and decisions are difficult to changeThe objective is to maximize the benefit of location to the firm

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Location and InnovationCost is not always the most important aspect of a strategic decisionFour key attributes when strategy is based on innovation

High-quality and specialized inputsAn environment that encourages investment and local rivalryA sophisticated local marketLocal presence of related and supporting industries

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Location Decisions

Long-term decisions Decisions made infrequentlyDecision greatly affects both fixed and variable costs Once committed to a location, many resource and cost issues are difficult to change

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Location DecisionsCountry Decision Critical Success Factors

1. Political risks, government rules, attitudes, incentives

2. Cultural and economic issues

3. Location of markets4. Labor availability, attitudes,

productivity, costs5. Availability of supplies,

communications, energy6. Exchange rates and currency

risks

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Location DecisionsRegion/

Community Decision

Critical Success Factors1. Corporate desires2. Attractiveness of region 3. Labor availability, costs, attitudes

towards unions4. Costs and availability of utilities5. Environmental regulations6. Government incentives and fiscal

policies7. Proximity to raw materials and

customers8. Land/construction costs

MN

WI

MI

IL IN OH

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Location DecisionsSite Decision Critical Success Factors

1. Site size and cost2. Air, rail, highway, and

waterway systems3. Zoning restrictions4. Nearness of services/

supplies needed5. Environmental impact

issues

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Factor-Rating MethodPopular because a wide variety of factors can be included in the analysisSix steps in the method1. Develop a list of relevant factors called critical

success factors2. Assign a weight to each factor3. Develop a scale for each factor4. Score each location for each factor5. Multiply score by weights for each factor for each

location6. Recommend the location with the highest point

score

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Factor-Rating ExampleCritical Scores

Success (out of 100) Weighted ScoresFactor Weight France Denmark France Denmark

Labor availabilityand attitude .25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0

People-tocar ratio .05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0

Per capitaincome .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0

Tax structure .39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3Education

and health .21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7Totals 1.00 70.4 68.0

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Locational Break-Even Analysis

Method of cost-volume analysis used for industrial locationsThree steps in the method

1. Determine fixed and variable costs for each location

2. Plot the cost for each location 3. Select location with lowest total cost for

expected production volume

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Locational Break-Even Analysis Example

Three locations:

Akron $30,000 $75 $180,000Bowling Green $60,000 $45 $150,000Chicago $110,000 $25 $160,000Selling price = $120Expected volume = 2,000 units

Fixed Variable TotalCity Cost Cost Cost

Total Cost = Fixed Cost + Variable Cost x Volume

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Locational Break-Even Analysis Example

–$180,000 –

–$160,000 –$150,000 –

–$130,000 –

–$110,000 –

––

$80,000 ––

$60,000 –––

$30,000 ––

$10,000 ––

Ann

ual c

ost

| | | | | | |

0 500 1,000 1,500 2,000 2,500 3,000Volume

Akron lowest cost

Bowling Green lowest cost

Chicago lowest cost

Chicago cost curve

Akron c

ost

curve

Bowling Green

cost curve

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Center-of-Gravity Method

Finds location of distribution center that minimizes distribution costsConsiders

Location of marketsVolume of goods shipped to those marketsShipping cost (or distance)

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Place existing locations on a coordinate grid

Grid origin and scale is arbitrary

Maintain relative distances

Calculate X and Y coordinates for ‘center of gravity’

Assumes cost is directly proportional to distance and volume shipped

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x - coordinate =∑dixQi

∑Qi

i

i

∑diyQi

∑Qi

i

i

y - coordinate =

where dix = x-coordinate of location idiy = y-coordinate of location iQi = Quantity of goods moved to or

from location i

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Center-of-Gravity MethodNorth-South

East-West

120 –

90 –

60 –

30 –

–| | | | | |

30 60 90 120 150Arbitrary origin

Chicago (30, 120)New York (130, 130)

Pittsburgh (90, 110)

Atlanta (60, 40)

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Center-of-Gravity MethodNumber of Containers

Store Location Shipped per MonthChicago (30, 120) 2,000Pittsburgh (90, 110) 1,000New York (130, 130) 1,000Atlanta (60, 40) 2,000

x-coordinate =(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

2000 + 1000 + 1000 + 2000= 66.7

y-coordinate =(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)

2000 + 1000 + 1000 + 2000= 93.3

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Center-of-Gravity MethodNorth-South

East-West

120 –

90 –

60 –

30 –

–| | | | | |

30 60 90 120 150Arbitrary origin

Chicago (30, 120)New York (130, 130)

Pittsburgh (90, 110)

Atlanta (60, 40)

Center of gravity (66.7, 93.3)+

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Transportation Model

Finds amount to be shipped from several points of supply to several points of demandSolution will minimize total production and shipping costsA special class of linear programming problems

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Worldwide Distribution of Volkswagens and Parts

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Strategic Importance of Layout Decisions

The objective of layout strategy is to develop an economic layout that will

meet the firm’s competitive requirements

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Good Layouts Consider

1. Material handling equipment2. Capacity and space requirements3. Environment and aesthetics4. Flows of information5. Cost of moving between various

work areas

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Types of Layout

1. Office layout 2. Retail layout 3. Warehouse layout4. Fixed-position layout5. Process-oriented layout6. Work cell layout 7. Product-oriented layout

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Office Layout

Grouping of workers, their equipment, and spaces to provide comfort, safety, and movement of informationMovement of information is main distinctionTypically in state of flux due to frequent technological changes

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Relationship Chart

Not desirableX

UnimportantU

Ordinary OKO

ImportantI

Especially importantE

Absolutely necessaryA

ClosenessValue

President

Chief Technology Officer

Engineer’s area

Secretary

Office entrance

Central files

Equipment cabinet

Photocopy equipment

Storage room

O

UA

X

O

U

A

I

OA

I

O

U

AI

I

A

UO

AU O

UX

O I

U

OII

I

E

EE

E E

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78

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Supermarket Retail Layout

Objective is to maximize profitability per square foot of floor spaceSales and profitability vary directly with customer exposure

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Five Helpful Ideas for Supermarket Layout1. Locate high-draw items around the

periphery of the store2. Use prominent locations for high-impulse

and high-margin items3. Distribute power items to both sides of an

aisle and disperse them to increase viewing of other items

4. Use end-aisle locations5. Convey mission of store through careful

positioning of lead-off department

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Store Layout

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Warehousing and Storage Layouts

Objective is to optimize trade-offs between handling costs and costs associated with warehouse spaceMaximize the total “cube” of the warehouse – utilize its full volume while maintaining low material handling costs

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Warehousing and Storage Layouts

All costs associated with the transactionIncoming transportStorageFinding and moving materialOutgoing transportEquipment, people, material, supervision, insurance, depreciation

Minimize damage and spoilage

Material Handling Costs

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Warehousing and Storage LayoutsWarehouse density tends to vary inversely with the number of different items storedAutomated Storage and Retrieval Systems (ASRS) can significantly improve warehouse productivityDock location is a key design element

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Cross-Docking

Materials are moved directly from receiving to shipping and are not placed in storage in the warehouseRequires tight scheduling and accurate shipments, typically with bar code identification

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Random StockingTypically requires automatic identification systems (AISs) and effective information systemsRandom assignment of stocking locations allows more efficient use of space

1. Maintain list of open locations2. Maintain accurate records3. Sequence items to minimize travel time4. Combine picking orders5. Assign classes of items to particular areas

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Customization

Value-added activities performed at the warehouseEnable low cost and rapid response strategies

Assembly of componentsLoading softwareRepairsCustomized labeling and packaging

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Fixed-Position LayoutProduct remains in one place Workers and equipment come to siteComplicating factors

Limited space at siteDifferent materials required at different stages of the projectVolume of materials needed is dynamic

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Alternative Strategy

As much of the project as possible is completed off-site in a product-

oriented facility

This can significantly improve efficiency but is only possible when

multiple similar units need to be created

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Process-Oriented Layout

Like machines and equipment are grouped togetherFlexible and capable of handling a wide variety of products or servicesScheduling can be difficult and setup, material handling, and labor costs can be high

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Surgery

Radiology

ER triage room

ER Beds Pharmacy

Emergency room admissions

Billing/exit

Laboratories


Patient A - broken leg

Patient B - erratic heart pacemaker

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Arrange work centers so as to minimize the costs of material handlingBasic cost elements are

Number of loads (or people) moving between centersDistance loads (or people) move between centers

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Layout at Arnold Palmer Hospital

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Minimize cost = ∑ ∑ Xij Cij

n

i = 1

n

j = 1

where n = total number of work centers or departments

i, j = individual departmentsXij = number of loads moved from

department i to department jCij = cost to move a load between

department i and department j

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Process Layout Example

1. Construct a “from-to matrix”2. Determine the space requirements3. Develop an initial schematic diagram4. Determine the cost of this layout 5. Try to improve the layout6. Prepare a detailed plan

Arrange six departments in a factory to minimize the material handling costs. Each department is 20 x 20 feet and the building is 60 feet long and 40 feet wide.

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Department Assembly Painting Machine Receiving Shipping Testing(1) (2) Shop (3) (4) (5) (6)

Assembly (1)

Painting (2)

Machine Shop (3)

Receiving (4)

Shipping (5)

Testing (6)

Number of loads per week

50 100 0 0 20

30 50 10 0

20 0 100

50 0

0


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Room 1 Room 2 Room 3

Room 4 Room 5 Room 660’

40’


Receiving Shipping TestingDepartment Department Department

(4) (5) (6)

Assembly Painting Machine ShopDepartment Department Department

(1) (2) (3)

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Cost = $50 + $200 + $40(1 and 2) (1 and 3) (1 and 6)

+ $30 + $50 + $10(2 and 3) (2 and 4) (2 and 5)

+ $40 + $100 + $50(3 and 4) (3 and 6) (4 and 5)

= $570

Cost = ∑ ∑ Xij Cij

n

i = 1

n

j = 1

48

100

50

20

50

50

2010

100

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Process Layout ExampleInterdepartmental Flow Graph

1 2 3

4 5 6

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Cost = $50 + $100 + $20(1 and 2) (1 and 3) (1 and 6)

+ $60 + $50 + $10(2 and 3) (2 and 4) (2 and 5)

+ $40 + $100 + $50(3 and 4) (3 and 6) (4 and 5)

= $480

Cost = ∑ ∑ Xij Cij

n

i = 1

n

j = 1

50


30

50

10

50

502050 100

100

Interdepartmental Flow Graph

2 1 3

4 5 6

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Room 1 Room 2 Room 3

Room 4 Room 5 Room 660’

40’


Receiving Shipping TestingDepartment Department Department

(4) (5) (6)

Figure 9.8

Painting Assembly Machine ShopDepartment Department Department

(2) (1) (3)

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Computer SoftwareGraphical approach only works for small problemsComputer programs are available to solve bigger problems

CRAFTALDEPCORELAP

Factory Flow

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Work CellsReorganizes people and machines into groups to focus on single products or product groupsGroup technology identifies products that have similar characteristics for particular cellsVolume must justify cellsCells can be reconfigured as designs or volume changes

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Advantages of Work Cells1. Reduced work-in-process inventory2. Less floor space required3. Reduced raw material and finished

goods inventory4. Reduced direct labor5. Heightened sense of employee

participation6. Increased use of equipment and

machinery7. Reduced investment in machinery and

equipment

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Improving Layouts Using Work Cells

Current layout - workers in small closed areas. Cannot increase output without a third worker and third set of equipment. Improved layout - cross-trained

workers can assist each other. May be able to add a third worker as additional output is needed.

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Improving Layouts Using Work Cells

Current layout - straight lines make it hard to balance tasks because work may not be divided evenly

Improved layout - in U shape, workers have better access. Four cross-trained workers were reduced.

U-shaped line may reduce employee movement and space requirements while enhancing communication, reducing the number of workers, and facilitating inspection

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Requirements of Work Cells1. Identification of families of products2. A high level of training and flexibility on

the part of employees3. Either staff support or flexible,

imaginative employees to establish work cells initially

4. Test (poka-yoke) at each station in the cell

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Staffing and Balancing Work CellsDetermine the takt time

Takt time =total work time available

units required

Determine the number of operators required

Workers required =total operation time required

takt time

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Staffing Work Cells Example600 Mirrors per day requiredMirror production scheduled for 8 hours per dayFrom a work balance chart

total operation time = 140 seconds

Sta

ndar

d tim

e re

quire

d

Operations

Assemble Paint Test Label Pack forshipment

60

50

40

30

20

10

0

60

600 Mirrors per day requiredMirror production scheduled for 8 hours per dayFrom a work balance chart

total operation time = 140 seconds

Staffing Work Cells Example

Takt time = (8 hrs x 60 mins) / 600 units = .8 mins = 48 seconds

Workers required =total operation time required

takt time

= 140 / 48 = 2.91

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Repetitive and Product-Oriented Layout

Volume is adequate for high equipment utilizationProduct demand is stable enough to justify high investment in specialized equipmentProduct is standardized or approaching a phase of life cycle that justifies investment Supplies of raw materials and components are adequate and of uniform quality

Organized around products or families of similar high-volume, low-variety products

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Product-Oriented LayoutsFabrication line

Builds components on a series of machinesMachine-pacedRequire mechanical or engineering changes to balance

Assembly linePuts fabricated parts together at a series of workstationsPaced by work tasksBalanced by moving tasks

Both types of lines must be balanced so that the time to perform the work at each station is the same

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Product-Oriented Layouts

1. Low variable cost per unit2. Low material handling costs3. Reduced work-in-process inventories4. Easier training and supervision5. Rapid throughput

Advantages

1. High volume is required2. Work stoppage at any point ties up the whole

operation3. Lack of flexibility in product or production rates

Disadvantages

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Assembly-Line Balancing

Objective is to minimize the imbalance between machines or personnel while meeting required outputStarts with the precedence relationships

1. Determine cycle time2. Calculate theoretical minimum number of

workstations3. Balance the line by assigning specific tasks

to workstations

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Copier Example

This means that tasks B and E cannot be done until task A has been completed

Performance Task Must FollowTime Task Listed

Task (minutes) BelowA 10 —B 11 AC 5 BD 4 BE 12 AF 3 C, DG 7 FH 11 EI 3 G, HTotal time 66

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Copier ExamplePerformance Task Must Follow

Time Task ListedTask (minutes) Below

A 10 —B 11 AC 5 BD 4 BE 12 AF 3 C, DG 7 FH 11 EI 3 G, HTotal time 66 I

GF

C

D

H

B

E

A

10

1112

5

4 3

711 3

Figure 9.13

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Copier Example480 available mins

per day40 units required

Cycle time =

Production time available per day

Units required per day= 480 / 40= 12 minutes per unit

Minimum number of

workstations=

∑ Time for task i

Cycle time

n

i = 1

= 66 / 12= 5.5 or 6 stations

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PerformancePerformance Task Must FollowTask Must FollowTimeTime Task ListedTask Listed

TaskTask (minutes)(minutes) BelowBelowAA 1010 ——BB 1111 AACC 55 BBDD 44 BBEE 1212 AAFF 33 C, DC, DGG 77 FFHH 1111 EEII 33 G, HG, HTotal time Total time 6666

Copier ExampleLine-Balancing Heuristics

Choose the available task with the least number of following tasks

5. Least number of following tasks

Choose the available task with the shortest task time

4. Shortest task time

Choose the available task for which the sum of following task times is the longest

3. Ranked positional weight

Choose the available task with the largest number of following tasks

2. Most following tasks

Choose the available task with the longest task time

1. Longest task time

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480 available mins per day

40 units requiredCycle time = 12 minsMinimum

workstations = 5.5 or 6



Copier Example

I

GF

H

C

D

B

E

A10 11

12

5

4

3 7

11

3

Station 1

Station 2

Station 3

Station 5

Station 4

Station 6

Figure 9.14

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Copier Example480 available mins

per day40 units required

Cycle time = 12 minsMinimum

workstations = 5.5 or 6

Efficiency =∑ Task times

(actual number of workstations) x (largest cycle time)

= 66 minutes / (6 stations) x (12 minutes)= 91.7%

Chapter 5 Location and Layout Strategies

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